The homebuying process comes with a potential pitfall many buyers don’t expect. A lender may approve you to borrow more than you can comfortably afford.
That’s not a knock on lenders. It’s just how the system works. A financial institution’s job is to assess whether you’re likely to repay the loan, not whether your mortgage payment leaves room for other financial priorities, such as retirement contributions, emergency savings, and car repairs.
A few rules of thumb can help you determine what percentage of your income should go towards your mortgage. Just know that a mortgage payment that meets these guidelines on paper can still strain your monthly cash flow.
The common rules of thumb (and what they actually mean)
The 28% Rule
Put simply, the 28% rule states that your total monthly housing expenses, including mortgage principal and interest, property taxes, and homeowners insurance, shouldn’t exceed 28% of your gross monthly income. It’s one of the most widely cited affordability guidelines in the mortgage world, although lender requirements vary.
The math is straightforward: If you earn, say, $7,000 per month in gross income, you should aim to keep your total housing payment at or below $1,960 ($7,000 x 28% = $1,960). Whether you can comfortably manage that amount is another question. This isn’t a hard rule, just a general guideline.
The 28/36 Rule
Another affordability benchmark, called the 28/36 rule, adds another layer to that 28% guideline. The 36% figure represents the recommended maximum percentage of your gross monthly income that goes toward all qualifying monthly debt payments combined. That includes your mortgage, car loans, student loans, minimum credit card payments, and other debts included in your debt to income (DTI) ratio.
Some mortgage lenders may allow DTI ratios of 43% to 45%, while FHA-insured loans may permit ratios as high as 50%. Those higher allowable DTI ratios can make the 36% guideline look conservative by current standards, and that’s the point. The 36% threshold isn’t necessarily a qualification ceiling. It reflects a more cautious approach that leaves breathing room between your monthly debt obligations and income.
The 35/45 Rule
A less commonly cited alternative looks at both pre-tax and after-tax income. Under the 35/45 rule, your total monthly debt, including your mortgage payment, shouldn’t exceed 35% of your gross income or 45% of your take-home pay.
You probably budget in terms of take-home pay instead of gross income, after all. Comparing your total monthly debt against both figures can give you a clearer picture of your monthly cash flow and how manageable those payments will feel each month.
Why the 28% Rule has limits
The 28% rule compares your monthly housing expenses with your gross monthly income. But your mortgage payment comes out of your take-home pay. Comparing the payment against both figures can give you a better idea of how manageable your budget may feel each month after you add the new financial obligation alongside your existing debts.
Gross income vs. take-home pay
Here’s an example of the difference between calculating housing expenses based on your gross income and comparing them with your take-home pay. Let’s say you earn $90,000 per year. Your gross monthly income is $7,500. Under the 28% rule, you’d aim to keep your monthly housing expenses at or below $2,100.
But depending on where you live, your tax situation, and your retirement contributions, your take-home pay could be around $5,200 per month. That $2,100 housing payment would represent roughly 40% of your actual monthly cash flow. That’s a very different picture than the 28% figure suggests.
The point isn’t that 28% of your gross income is the wrong target. However, running the numbers against your take-home pay may provide a more realistic financial picture. Using net income for this comparison shows how a new mortgage payment would fit into the money that actually reaches your bank account each month.
When your market makes 28% difficult
In many high-cost U.S. metros, staying under 28% of your gross income can be difficult. Current home prices and interest rates can make homeownership prohibitive unless you’ve got a particularly high income. If you live in an expensive market, you may already have a sense of whether following the 28% rule is realistic before you even reach for a calculator.
The practical question for buyers in expensive markets isn’t always how to hit that 28% target, but rather how far above it they can go without putting themselves in a precarious financial position. They also need to consider what conditions need to be true for the higher payment to be manageable.
How to stress-test a mortgage payment before you commit
Affordability isn’t just about hitting a percentage on a spreadsheet. It’s also about asking the right questions about your finances—questions a “rule of thumb” won’t answer. Still, these guidelines can be a good starting point.
Can you still save after making the payment?
A mortgage payment is only sustainable if it leaves room for your other financial needs. One general savings guideline recommends setting aside 10% of your gross income each month for retirement or emergencies, although the amount you can realistically save depends on your budget.
If a mortgage payment leaves nothing for savings, it may be more than you can comfortably afford, even if a lender will approve it. Someone taking home $5,200 per month who spends $2,100 on housing has $3,100 left for everything else. Whether that works depends entirely on what everything else in their life costs.
What happens if your income drops?
A better test of mortgage affordability is whether you could still make your payment if your income dropped. A job loss, a shift to part-time work, or an unexpected medical expense can change the math quickly and turn a manageable payment into a strain.
In a two-income household, ask a similar question: If one partner’s income disappeared tomorrow, could you still cover the mortgage with the other partner’s income or your emergency savings? Consider borrowing only the amount you feel confident you could keep paying if your financial circumstances changed.
Are you accounting for the full cost of the home?
Principal, interest, taxes, and insurance (known as PITI) may make up your monthly mortgage payment. But owning a home comes with other costs that renters don’t carry. One common rule of thumb recommends setting aside between 1% and 4% of your home’s value each year for maintenance and repairs. For a $400,000 home—roughly in line with current national home prices—that’s $4,000 to $16,000 per year. Even at the low end, you’d need to set aside about $333 per month for expenses that don’t show up on your mortgage statement.
HOA fees, higher utility bills, and property upkeep can add hundreds of dollars per month to the real cost of homeownership. If you budget only for PITI, you may find yourself financially stretched because you didn’t account for the full picture.
What lenders look at vs. what you should look at
One metric mortgage lenders use to evaluate borrowers is their debt-to-income ratio (DTI), which compares your monthly debt payments with your gross monthly income. DTI helps lenders assess your ability to manage the mortgage payment—not whether that payment will fit comfortably into your actual life.
Many conventional loans allow DTI ratios of up to around 45%. Some automated underwriting systems may allow ratios as high as 50% for borrowers with other qualifying financial characteristics.
While lenders look at your gross income, DTI, credit score, and assets, you should be focusing on things like:
- Your take-home pay
- How much you’re saving after housing
- Whether your income is steady and reliable
- The full monthly cost of owning the home
All of which is to say: Borrow with your eyes wide open. Don’t ignore any expense.
What percentage is right for you?
If you have stable income, low debt, and a fully funded emergency reserve, staying at or below 28% of your gross income for housing may be manageable without sacrificing financial breathing room.
If you carry moderate debt or your income varies from month to month, you may want to consider a more conservative housing target of 25% or less. That smaller percentage leaves more room for all your other expenses and can make it easier to weather a financial setback without scrambling.
Some households in high-cost cities spend 30% or more of their gross income on housing. However, spending 30% or more on housing generally qualifies a household as cost-burdened. A higher percentage may also be more manageable when other debt is low, income is steady, and savings are in good shape. As housing consumes more of your income, you may need to cut back on savings and day-to-day spending to make the payments.
The takeaway
Just because a lender offers you a large sum of money doesn’t mean you can comfortably afford a home at that price. Taking on an unaffordable mortgage payment can lead to financial stress and, in severe cases, missed payments.
Before you accept a mortgage quote, start with the 28/36 rule to estimate what percentage of your income could go toward housing. Then test the estimated housing payment against your actual budget, savings goals, and local housing costs to see if it truly fits.
Frequently asked questions
Should HOA fees count toward my mortgage-to-income percentage?
Yes. You should count HOA fees as part of your total monthly housing costs when calculating your mortgage-to-income percentage.
How much should a two-income household spend on a mortgage compared to a single-income household?
A two-income household can use the same general guideline to keep total housing expenses at around 28% of gross income or less. However, consider whether you could still afford the payment if one income dropped or disappeared.
What’s the difference between front-end and back-end DTI ratios?
Front-end DTI looks at your housing costs, including your mortgage payment, taxes, insurance, and HOA fees. Back-end DTI considers all of your monthly debts, from housing and car loans to student loans and credit cards.
What is the maximum DTI ratio lenders will approve?
Many home loan programs allow DTIs ranging from the low 40s to around 50%, depending on the program and the borrower’s qualifications.
How much should I budget for home maintenance on top of my mortgage payment?
A common rule of thumb recommends setting aside 1% to 4% of your home’s value per year for maintenance and repairs. You should budget separately for HOA fees and other homeownership costs.
